The articles written on this blog are based on my personal analysis. The securities target prices are for information only and is not an offer to buy or sell. The reliance on these recommendations are not guaranteed as they are based on my personal assessment as a Financial Analyst. My analysis is based on Business TV Channels, Business/ Financial websites, and from Finance books. All views that I presented are to the best of my knowledge and I invest in Stock Market with this analysis in mind. While the information contained herein is from sources believed reliable, I do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time.

Saturday, July 10, 2010


Before discussing the investment technique, let me inform you that KSE 100 is having a bull run and this week it closed at almost 10,000. All of the shares that I recommended are going very well, especially POL which has gone to 222. As I have already told you market is still well below its upper limit of 12,000, therefore those investors who haven’t taken the positions can still enter in the market and make profits, so good luck with that. Now we discuss an important investment technique that will help you in getting decent return from KSE 100.

As we all know one thing that is always found in emerging stock markets is “Volatility”. Same is the case with Pakistani stock market. So how can we deal with it? The only way you can deal with this is to book your profits, i.e. sell your shares whenever they appreciate even if you have hold them for a medium to long term perspective. This is how you can increase your return. Don’t sell your entire position but just part of your position. This can be explained easily by two simple examples. (Note: Keep in mind, this strategy should be worked with main stocks i.e. Blue Chip Stocks in our language, all the shares that I recommended are blue chip stocks except PACE Pakistan).

Example 1: When you don’t book the part of your profit.
You bought 100 shares of POL at 200 with the target price of 250.

Investment = 20,000
Expected Return = 25%

If you purchase shares for Rs, 20,000 and when shares reach it’s target price after one year you sell it off and get 25,000. This is equivalent to 25% return.

Initial Investment = 20,000
Final Outcome as cash = 25,000
Gain = 5,000
Return = 25%

Example 2: When you book part of your profit.

Investment = 20,000

Now suppose after 3 months, one share of POL is at 225. You sell 25 shares at this price. So your inflow is 5,625.

Value of your investment after 3 months = (225*75) +5,625 = 22,500.

So now after three months you have 5,625 at your hand as cash and you have 75 shares of POL invested in your portfolio. Now suppose b/c of some political noise or b/c of some general profit taking (like you, many investors will sell their shares and book profit and this can push market downward) market has gone down and share of POL is now trading at 210. Now is the time for you to get the shares again. You have 5,625 in hand so you can buy 5,625/210 = 27 shares of POL (earlier you sold 25 shares but now you have bought 27, i.e. 2 more shares and now you have 75+27 = 102 shares). Suppose 9 more months have passed at now share of POL is of 250 that is, it has reached its target price. So now you sell your entire position. You will get back 102*250 = 25,500.

Initial Investment = 20,000
Final Outcome as Cash = 25,500
Gain = 5,500
Return = 27.5%.

Now as we can see you have increase you gain by 10%, yes by 10%. (500/5000) = 10%

This is the gain by simply booking the profit just one time; you may even get more than one opportunity to book profit and in that case you return will compound and would be much greater than this 27.5%. And with the volatility of KSE 100, this is certainly possible.

I don’t think the mathematics behind this is complex to understand. See the Chart showing the price of any share for the last year and simulate the above mentioned strategy and see the magic for yourself.

Disclosure: The above technique can not always give you extra return as we always say that in Portfolio Management lot of variables influence the market and result of different strategies. The above technique is some thing that I have found to be useful and have worked for me many times, that’s why I shared it with you. The results of above mentioned surely can not be guaranteed and Investors can try this on their own responsibility. I will not have any responsibility for the failure of above mentioned strategy. The example that I have presented is an assumed scenario for explaining the strategy.

No comments:

Post a Comment